GOP Lawmakers Pressure SEC on Ad Disclosures

Two key House Republicans are demanding the Securities and Exchange Commission withdraw investor safeguards the agency proposed earlier this month when it voted to lift an 80-year old advertising ban for hedge funds and other businesses seeking to raise cash through private placements.

Reps. Patrick McHenry (R., N.C.) and Scott Garrett (R., N.J.) said they believe some of the rules floated by the agency earlier this month run counter to the intent of Congress, which required the SEC to lift the ad ban as part of last year’s JOBS Act. The lawmakers said the proposed rules will impose an undue burden on smaller businesses, fueling uncertainty and potentially leading firms to delay taking advantage of the eased ad restrictions.

The agency’s 4-1 vote earlier this month to lift a decades-old ad ban satisfies a provision in last year’s Jumpstart Our Business Startups Act, which was aimed at making it easier for smaller businesses to raise fund. Investors in such deals must be wealthy institutions or individuals.

The commission also voted 3-to-2 – with two Republicans in opposition—to propose the related package of safeguards aimed at addressing concerns by anxious investor advocates, who worry repealing the advertising ban will invite more fraud. The safeguards weren’t required by the JOBS Act, but investor groups, state securities regulators and even the Chamber of Commerce urged the agency to take additional steps to ensure investors aren’t taken advantage of after the SEC lifted the ad ban.

The SEC declined to comment.

In their letter, the lawmakers said their “primary concern” lies with a proposed requirement that hedge funds and companies notify the SEC 15 days before an offering will be publicized, a delay they described as “an apparent error” that “appears to violate the law by imposing a fifteen day ban on general solicitation.”

“Congress did not say that the Commission can delay free speech for fifteen days,” the letter said. “The Commission must withdraw this proposed pre-filing requirement.”

Currently, businesses must file a notification within 15 days following the first sale, but there are few if any penalties for failing to do so.

Many firms will be unwilling to take advantage of the eased ad restrictions until the SEC finalizes the package of added disclosure requirements, the lawmakers said.

“In effect, for careful issuers, the ban on general solicitation remains in place,” the lawmakers wrote, adding the agency didn’t properly consider the proposal’s compliance costs on small businesses.